The Wall Street Journal - 21.10.2019

A2| Monday, October 21, 2019 ** THE WALL STREET JOURNAL.

U.S. WATCH

GEORGIA

Fort Stewart Crash

Kills Three Soldiers

U.S. Army officials said three

soldiers were killed and three

others were injured when the ar-

mored vehicle they were riding

in was involved in an accident

during training at Fort Stewart

in Georgia.

Officials with the Fort Stew-

art-Hunter Army Airfield’s Third

Infantry Division said in a news

release that the accident oc-

curred early Sunday morning.

The release had few additional

details, and a spokesman said

the Army wasn’t saying any-

thing more.

The soldiers were with the

First Armored Brigade Combat

Team and were in a Bradley

fighting vehicle. They weren’t

immediately identified.

The Army said the three in-

jured soldiers were evacuated

and taken to an Army hospital,

where they were being evalu-

ated and treated.

—Associated Press

FLORIDA

Rooney to Retire

After Two Terms

Florida Rep. Francis Rooney

said he would retire at the end

of his second term, a day after

he made comments critical of

the Trump administration.

Mr. Rooney joins a lengthy

list of House Republicans who

are leaving Congress at the end

of their terms or have resigned.

His spokesman confirmed his

decision, which he also an-

nounced Saturday on Fox News.

Mr. Rooney stepped out on

Friday, expressing alarm after

acting White House chief of

staff Mick Mulvaney laid out a

quid pro quo when he said the

U.S. had withheld aid to Ukraine

to probe a Democratic National

Committee server related to the

2016 election.

Mr. Trump has repeatedly de-

nied there was any quid pro quo

related to the aid. Late Thursday

afternoon, Mr. Mulvaney issued

astatement,reviewedbyMr.

Trump, reversing his remarks

and saying there was no connec-

tion between military aid to

Ukraine and the U.S. election.

“Whatever might have been

gray and unclear before is cer-

tainly clear right now,” Mr.

Rooney said Friday on CNN.

—Natalie Andrews

NEW ORLEANS

Demolition Leaves

One Crane Hanging

Officials set off explosions

Sunday to topple two cranes

looming precariously over a par-

tially collapsed hotel in New Or-

leans, but most of one crane ap-

peared to be left dangling atop

the ruined building while the

other crashed down.

The explosions set off large

clouds of dust. After the dust

cleared, part of one crane could

be seen hanging over the build-

ing while the end of one of the

cranes fell to the ground.

The demolition came a little

over a week after the deadly

collapse of the Hard Rock Hotel

that was being built near a cor-

ner of the city’s historic French

Quarter.

The two cranes had been

badly damaged when the hotel’s

upper floors pancaked onto each

other. Three workers died in the

disaster.

The cranes had been tilting

dangerously, and officials had

feared the towers would come

down on their own, possibly

smashing into nearby buildings.

—Associated Press

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U.S. NEWS

ECONOMIC

CALENDAR

Tuesday: The National Asso-

ciation of Realtors releases fig-

ures on existing-home sales.

Economists surveyed by The

Wall Street Journal expect sales

pulled back in September and

posted a 0.2% decline.

Thursday: The Commerce

Department issues figures on

September durable-goods or-

ders. Economists expect orders

for durable goods—manufactured

products intended to last at

least three years—fell 0.8% in

September from a month earlier.

Surveys of purchasing man-

agers in the eurozone are also

due out Thursday. Economists

expect the composite purchas-

ing managers index —an aggre-

gate measure of manufacturing

and services activity—to rise to

50.3 from 50.1 in September,

barely above the 50.00 level

that separates expansion from

contraction.

The surveys will be released

as officials from the European

Central Bank begin the final

session of their policy meeting.

They are expected to leave the

centralbank’skeyinterestrate

unchanged at minus 0.5%, hav-

ing lowered it in September and

restarted a paused program of

bond purchases.

Friday: The University of

Michigan will issue final results

of its October consumer senti-

ment survey. Preliminary results

showed U.S. consumers were

feeling more positive in early Oc-

tober, but were still cautious.

Consumer spending has helped

drive the U.S. economy this year,

but recent data have suggested

Americans may be pulling back

on shopping. Retail sales—a

measure of purchases at stores,

at restaurants and online—de-

creased a seasonally adjusted

0.3% in September from a

month earlier, the first monthly

decline since February.

$100 billion worth of bonds

trade with yields like junk de-

spite their triple-B-minus rat-

ings, pricing info from Advan-

tage Data Inc. shows. That is

despite a flood of cash into in-

vestment-grade debt.

Investors and analysts have

told the Securities and Ex-

change Commission that they

are concerned about the

buildup of triple-B debt.

Last October, Adam Rich-

mond, Morgan Stanley’s then

head of U.S. credit strategy, tes-

tified at an SEC hearing that if

leverage were the sole criteria

for ratings, many triple-B-rated

companies wouldn’t qualify for

such high grades.

Moody’s and S&P both say

other factors they consider

show less risk among triple-B-

rated companies. Cash flow rel-

ative to debt has improved

even as leverage has increased,

S&P says. Moody’s analysts

wrote in a January report that

these borrowers are “substan-

tially larger, more profitable

and less burdened by interest

expense than in 2007.”

Last year, S&P upgraded

Kraft, one of the biggest cor-

porate borrowers, saying cost

savings would help push lever-

age below four times annual

earnings by late 2019. In June,

S&P downgraded Kraft as the

company restated past earn-

ings but kept Kraft at the low-

est rung of investment-grade,

giving it another two years to

meet the target. In September,

S&P estimated leverage was in

the “high-4x area.”

“How long do you give man-

agement the benefit of the

doubt?” said Lon Erickson, a

portfolio manager at Thorn-

burg Investment Management,

who oversees $7 billion in cor-

porate debt, including some

Kraft bonds.

A spokesman for the com-

pany said that “Kraft Heinz re-

mains committed to our invest-

ment-grade status.” S&P raised

questions about the bonds in

an August report but said it is

waiting to see how a new strat-

egy expected at the company

next year will affect them.

The ratings firms say they

question companies’ debt-re-

duction plans. “By nature we

are a pretty skeptical bunch.

We like to poke holes in sto-

ries,” said Peter Abdill, who

oversees Moody’s ratings for

consumer-products companies.

One company that has been

given significant leeway by

ratings firms is Newell Brands..

This past February, Newell

announced that its debt was

3.5 times earnings at the end

of 2018. But Newell failed to

account for lost earnings from

businesses it sold in 2018.

Moody’s and S&P’s leverage

estimates mirrored Newell’s ap-

proach, according to a Journal

review of their 2018 calcula-

tions. Moody’s estimated New-

ell’s year-end leverage at 3.

times. S&P put it at 3.9 times.

Earlier this month, Moody’s

updated its calculation of New-

ell’s year-end 2018 leverage to

six times earnings. S&P raised

its number to 5.4 times earnings.

An S&P spokesman said in

an email that “our analysis

speaks for itself.”

Moody’s confirmed its 2018

calculation included earnings

from businesses Newell had

sold. Moody’s said the calcula-

tion was just a different way of

measuring leverage.

rent law, U.S. businesses gen-

erally can’t work collectively.

While unions represent

workers at multiple employ-

ers, they must negotiate con-

tracts with individual firms.

Sectoral contracts discourage

employee movement be-

tween firms because they are

unlikely to receive a raise by

taking a job at a competitor.

The German labor system

deserves some credit for a

long period of postwar pros-

perity, said Thomas Griebe, a

Hamburg-based employment

attorney at Vangard Littler

who represents management.

He said that is in part be-

cause a close relationship

between management and

workers has allowed easier

concessions during economic

slowdowns.

But if the works-council

system didn’t exist today, he

doubts Germans would be

clamoring to create it.

“The current system is

not in line with the modern

world of working,” he said.

“The system creates more

costs for the firms, and the

benefits of the system are

hard to calculate.”

German wages have

grown more slowly than U.S.

wages since 2000, even

though Germany has higher

unionization rates. In 2000,

German workers earned

109% the average wage of

U.S. workers, when adjusting

for currency differences.

Now they earn 99% of the

wage paid to U.S. workers,

according to data from the

Organization for Economic

Cooperation and Develop-

ment. Comparing total com-

pensation is difficult because

German workers receive

THE OUTLOOK|By Eric Morath

German Labor Ties Don’t Translate

MUNICH,

Germany—
Some Demo-
cratic presi-
dential
candidates
want to bring elements of Ger-
man labor relations to the U.S.
While that could appear at-
tractive on the surface, doing
so would be difficult and the
economic payoff uncertain.
Labor unions are much
more prevalent in Germany
than in the U.S. under a sys-
tem called Sozialpartner-
schaft , or social partnership.
It has fans among both cor-
porate leaders and unions
here.Thesystemiscredited
with giving German workers
job security and a greater
voice in how companies are
run. But labor experts view
it as a uniquely German sys-
tem developed when manu-
facturing giants dominated
the economy.
“A model like Sozialpart-
nerschaft that has grown
over decades is based on
many economic, cultural and
social aspects,” said Solveigh
Hieronimus, a McKinsey &
Co. partner in Munich who
advises on labor-market
strategies. “It is probably
not easily transferable to
other countries.”

T

he German system has
two main features that
separate it from the U.S.
One is works councils—
employee representatives
who have a say in company
management. In large German
firms, these workers hold half
the seats on corporate
boards, to which the chief ex-
ecutive reports. Sen. Eliza-

beth Warren (D., Mass.), a

Democratic presidential can-

didate, has proposed legisla-

tion that would require large

U.S. companies to have labor

representatives on corporate

boards, saying that would

hold firms more accountable

to employees and communi-

ties where they operate.

Such councils have been

criticized by business groups

for drawing out decision

making around reorganiza-

tions or adoption of new

technology at a time when

German companies are fac-

ing competition from Asia

and the U.S.

“There’s a big contradiction

between the needs of the

union and the needs of the

company,” said Bertram Bros-

sardt, chief executive of the

Bavarian Industry Association.

The other key feature of the

German system is sectorwide

contracts. Sen. Bernie Sanders

(I., Vt.), another candidate for

the Democratic presidential

nomination, has supported

this with the aim of extending

the better pay and benefits re-

ceived by union members to

more U.S. workers.

German business associa-

tions negotiate labor con-

tracts with unions that apply

to multiple employers in an

industry, such as metal pro-

cessing or grocery stores.

The result is that even non-

unionized businesses often

follow the wage structure

agreed to in the contract for

their industry.

In the U.S., such sectoral

contracts would require a

significant rewrite of labor

law, a difficult prospect in a

divided Congress. Under cur-

health care and more gener-

ous retirement benefits from

the government.

W

hile the German sys-

tem has won praise

from some U.S. poli-

ticians, unionization rates in

Germany have fallen as its

economy faces pressures

from lower-cost foreign labor

and a move toward less-

unionized fields, such as in-

formation technology.

German labor leaders,

however, say they their sys-

tem has clear benefits.

U.S. labor-market fluctua-

tions have downsides for some

workers. But the American

system has aided in the cre-

ation of leading technology

firms and supported a decade-

long stretch of growth, while

Europe’s economy has grown

in fits and starts.

Another challenge to

bringing a German-style sys-

temtotheU.S.:Thereisa

small base of unionized

workers to build it on. In the

U.S., 12% of workers were

represented by labor unions

in 2018, according to the La-

bor Department.

In contrast, 46% of Ger-

mans work for employers

subject to collective-bargain-

ing agreements negotiated

by unions, according to the

Institute for Employment Re-

search in Nuremberg.

U.S. workers appear to

have chosen not to follow in

Germany’s footsteps, said

Mr. Brossardt of the industry

association. “To change tra-

ditions, I don’t know if it’s

possible if the employees

don’t want to take part in a

union,” he said.

ThepercentageofworkersinGermanysubjecttodealsnegoti-

atedbyunionsisonthedecline.Atthesametime,wagesforU.S.

workersroseatafasterratethanforGermanworkers.

Sources: Institute for Employment Research (union membership); Organization for Economic

Cooperation and Development (wages)

Note: Wages are seasonally adjusted

WagesinGermanyrelative

tothoseintheU.S.

110

90

95

100

105

%

2000 ’

ShareofGermanworkers

subjecttocollectivebargaining

60

40

45

50

55

%

2000 ’

plus years, to see how much
more leverage a number of
these companies can incur with
the same credit rating,” said
Greg Haendel, a portfolio man-
ager at Tortoise in Los Angeles
overseeing about $1 billion in
corporate bonds. “There’s defi-
nitely some ratings inflation.”
Years of rock-bottom inter-
est rates have fueled a boom in
borrowing, driving debt owed
by U.S. companies excluding
banks and other financial insti-
tutions to nearly $10 trillion—
up about 60% from precrisis
levels. Leverage—how much
debt a company owes relative
to its earnings—hit a high in
the second quarter of this year,
according to JPMorgan Chase
& Co. data on investment-
grade bonds going back to
2004, which also excludes fi-
nancial companies.
The buildup has fueled one
of the most divisive debates on
Wall Street: Will higher debt
loads cause big losses when
the economy turns? Or have
low interest rates made the
borrowing more manageable?
Moody’s and S&P say their
ratings are accurate because
companies like Newell have
solid, global brands and gener-
ate sufficient cash flow to pay
off the bonds. “We take rating
actions where appropriate in
line with our methodologies,”
said Tom Mowat, analytical
manager at S&P Global Rat-
ings. The ratings firms also
say their grades have accu-
rately predicted defaults,
which is their main purpose.
S&P and Moody’s rate New-
ell, Kraft and Campbell Soup in
their triple-B category, which
is the lowest for bonds consid-
ered investment-grade. Such
bonds are popular with inves-
tors because they are consid-
ered unlikely to lose money. A
downgrade below the lowest of
the three notches in the cate-
gory, triple-B-minus, would
drop the companies into the
junk-bond category, which
could raise their borrowing
costs.
The triple-B rating has ex-
ploded in the past decade, with
debt outstanding more than
tripling to $3.7 trillion, Inter-
continental Exchange data
show. These days, about half of
all investment-grade bonds are
rated triple-B, up from 38% in
September 2009.
Investors are skeptical of
some of the ratings. More than

ContinuedfromPageOne

Firms Get

Leeway on

Ratings

LosingFaith

InvestorsaredemandingmoreyieldtoholdNewellandKraftbondsthantheyareother,

similarly-ratedcorporatedebt.

Bondyield NewellBrands KraftHeinz Moody'sBaa3bondsindex

Source: Advantage Data

Note: Chart compares lowest yields attainable on bonds due 2046 sold by each company. Kraft and Newell are rated Baa3 by Moody's.

6.

3.

3.

4.

4.

5.

5.

6.

%

2017 ’18 ’

Years of rock-

bottom interest

rates have fueled a

boom in borrowing.

Readers can alert The Wall Street Journal to any errors in news articles by

emailing [email protected] or by calling 888-410-2667.

The U.S. women’s indoor

volleyball team won a silver

medal at the 2008 Beijing

Olympics. The Captain Class

column in Exchange on Satur-

day incorrectly said the team

won a gold medal.

Former Vice President Joe

Biden, speaking in Altoona,

Iowa, on Oct. 13, said, “No one

in my family will have an office

in the White House, will sit in

on meetings as if they’re a cab-

inet member, will in fact have

any business relationship with

anyone that relates to a foreign

corporation or a foreign coun-

try, period.” A Page One article

on Monday about Mr. Biden’s

son Hunter Biden stepping

down from a director’s posi-

tion at a Chinese private-eq-

uity firm misquoted Mr. Biden

as saying “foreign corporation”

twice instead of “foreign cor-

poration or a foreign country.”

A chart with the Streetwise

column in Business & Finance

on Oct. 9 showing consumer-

price inflation displayed U.S. re-

cessions but omitted the reces-

sion of July 1990-March 1991.

CORRECTIONSAMPLIFICATIONS